When did it all go so wrong, America? How about August of 2007? Back then, the economy was in the midst of its 24th straight quarter of economic growth, the unemployment rate was 4.7 percent, and oil was $70 a barrel. But it was during that month that the subprime mortgage contagion turned Wall Street and financial centers elsewhere into a hot zone of trouble. The escalation of a worldwide credit crisis forced the Federal Reserve and other major central banks to pour money into the global financial system. And things haven't been the same since.
Turning point. Fears about the health of the U.S. economy sent the dollar plunging and oil prices rising, eventually nearing $150 a barrel. The "oil tax" slowed the economy to recessionary levels and pushed up the jobless rate, all of which made the housing crisis even worse. And that, in turn, exacerbated the credit crunch until credit markets virtually shut down this September. The White House responded with a $700 billion rescue plan, but the prospect of a global recession set in motion a slow-motion stock market crash. Forget Iraq and global warming. The key issues in this presidential campaign are all economic: jobs, housing, and whether we might be headed into a depression.
Where McCain stands. John McCain wants to make permanent all the 2001 and 2003 cuts in income and investment taxes, as well as the enlarged child tax credit. In addition to doubling over time the dependent exemption from $3,500 to $7,000, he wants to cut the corporate income tax rate, currently the second-highest in the world behind Japan's, from 35 percent to 25 percent as a way of keeping jobs in America. Given his budget-hawk reputation, it's no surprise that McCain says he wants to balance the federal budget by the end of his first term through a combination of higher economic growth and less spending. McCain also has said the Treasury Department should refinance bad mortgages to the tune of $300 billion.
Where Obama stands. With the economy weak and unemployment rising, Barack Obama's campaign has shifted its focus a bit. Initially, it concentrated mostly on reducing income inequality by raising income taxes on wealthier Americans and keeping the rest of the Bush tax cuts, giving a $1,000 tax credit to middle-class parents, and eliminating income taxes for seniors making less than $50,000. Now, the campaign talks largely about growing the economic pie. Whereas McCain wants to fix the economy by freeing up the private sector through lower taxes, Obama thinks it's time Uncle Sam opened his wallet to boost job creation and incomes. Obama also wants to spend $60 billion over the next decade on infrastructure upgrades. These upgrades, combined with the candidate's energy initiatives, Team Obama says, would generate high-paying jobs for middle-class workers and "bottom up" economic growth that would help reverse the perceived inequality of the past decade. Obama is pushing a pricey stimulus plan, which is a combination of rebates, expanded unemployment insurance, and aid to states. Like McCain, he supports the ever evolving Paulson bailout plan.
Bottom line. Neither economic plan seems likely to prevent an economic downturn that is as bad as Americans have experienced in many years. But most economists do agree with at least portions of both plans. Corporate tax rates are too high, they say, and our infrastructure could use some work. But that stuff would more likely help long-term economic growth. For now, welcome to Pain City.